PayPal: 12M monthly users are paying for virtual goods (updated)

More than 12 million unique users pay for virtual goods each month, according to data released for the first time today by digital payments vendor PayPal.

Update: The figure comes from research by Inside Network, and dates to mid-2010. It applies to the entire online audience in the U.S., not just Facebook, according to Inside Network’s Justin Smith.

For comparison, 12 million is only about 1.6 percent of the 750 million users on Facebook, but it’s enough to create a big social game industry capable of supporting giants such as Zynga, which generates hundreds of millions of dollars in revenue per quarter.

PayPal, which collects a lot of data on online payments, says the monetization of digital content has come a long way since the company was launched in 1998 and sold to eBay in 2002. Now it generates more than $1 billion in quarterly revenue and has more than 100 million active users.

When PayPal launched, it described its payment system as the online equivalent to dropping a quarter in a machine to buy a gumball or play Pac-Man. Now it’s use to purchase everything from news features on FT.com to games on the Xbox Live online gaming service.

According to PayPal, more than 40 percent of adults play online games. More than 70 percent of all gamers are PayPal customers. About 62 percent of North American virtual goods sales are facilitated by PayPal or credit cards. And a significant portion of gamers said they would buy more virtual goods if they could earn loyalty credits as a result.

Carey Kolaja, senior director of emerging opportunities at PayPal, said in an interview that the social game sector has been growing dramatically for the past couple of years.

“The growth of PayPal in games was organic, and now there are more and more ways to pay for goods online,” Kolaja said.

eMarketer says the market will be $1 billion in 2011, while Inside Network estimates that U.S. virtual goods revenue will be $2.1 billion in 2011. Internationally, the virtual goods market is about $6 billion, with huge growth in Asia.

PayPal, a subsidiary of eBay, can be used to pay for physical goods on auction sites. But it’s also used these days to pay for digital goods, such as virtual goods in Facebook games.

PayPal has been able to customize its risk models for gaming to deal with things like fraud. Over a decade, it learned how to spot fraudulent transactions. It uses algorithms, or automatic formulas, to cut off fraud before it is executed, Kolaja said. PayPal also allows disputes in digital payments to be resolved automatically up to certain threshold levels. That allows for a smoother, frictionless, more convenient flow of transactions.

PayPal recently went live on Xbox Live and saw a significant jump in transactions. Of the 12 million monthly game payers on Facebook, more and more are willing to pay for things such as bundles of currency. While currency purchases were small at first, now more people are paying higher and higher amounts.

“In massively multiplayer online games, the number of paying gamers keeps going up,” Kolaja said. “The perception about digital goods is that they lead to micro transactions, which are small. But the average purchase for a paying user is in the mid-20s (in dollars). It is on a positive trajectory.”

In MMOs, about 19 percent of purchases of virtual currency are under $10. About 54 percent are for $10 to $50. And 27 percent are for $50 and up. In social games, 33 percent of purchases are under $10. About 58 percent are $10 to $50. And 9 percent are $50 and more. In casual web site games, 29 percent of purchases are under $10. About 49 percent are $10 to $50. And 22 percent are for $50 and more.

In terms of hours played per week, MMO players play for 22 hours a week and 40 percent play daily; social gamers play 16 hours a week and 56 percent play daily; and casual gamers player for 8 hours a week and 34 percent play daily. About 77 percent of MMO gamers are male, while 59 percent of social and casual gamers are female.

The top games played by PayPal customers are World of WarCraft, Final Fantasy, Bejeweled, and FarmVille.

Kolaja said that alternative payments — where users pay for something without using bank accounts or credit cards — are also a big growth industry.

“We recognize the need to go into that space,” Kolaja said.

Correction: This story was updated on 8/1/2011 to reflect the fact that the 12M monthly users figure applies to the whole online population in the U.S., not just Facebook, and that it dates from mid-2010.